The Defeat of Deemed Dividends: Tax Court Annuls WHT Article 26 Correction Stemming from Transfer Pricing Without Real Cash Flow   

The application of the Arm's Length Principle in affiliated transactions frequently triggers layered disputes, especially when the primary Transfer Pricing (TP) correction on Corporate Income Tax is followed by a secondary adjustment in the form of Withholding Tax Article 26 (WHT Art. 26), classified as a deemed dividend. The case of PT OE at the Tax Court (Decision Number PUT-001315.13/2024/PP/M.XVA Tahun 2025) serves as a critical study highlighting the absolute legal nexus between these two corrections, ultimately resulting in the cancellation of the taxpayer’s WHT Art. 26 obligation.
The Directorate General of Taxes (DGT) maintained the WHT Art. 26 correction on an object amounting to Rp8.13 billion. This correction was based on Article 22 paragraph (8) of Minister of Finance Regulation Number 22/PMK.03/2020, which allows the discrepancy from a TP adjustment to be treated as a dividend subject to WHT Art. 26. The DGT argued that the profit the taxpayer should have earned (based on the DGT's arm's length operating margin analysis) had been distributed to its foreign affiliated entity. In response, the Taxpayer (WP) strongly refuted the assumption of a dividend. The WP argued that a fiscal correction that is deemed (assumed) does not automatically fulfill the material elements required by Article 26 of the Income Tax Law. The WP emphasized that WHT Art. 26 is only due on income that is paid, provided to be paid, or due for payment, and in this case, there was no realization of dividend payment or a decision by the General Meeting of Shareholders (GMS). Furthermore, the WP contended that the DGT’s TP analysis failed to adequately consider the significant impact of the COVID-19 Pandemic on the 2020 financial performance.
During the dispute examination, the Panel of Judges determined that the WHT Art. 26 dispute was a direct consequence of the primary TP correction in the same tax year's Corporate Income Tax. The Panel ruled that the basis for the WHT Art. 26 correction would lapse if the primary Corporate Income Tax correction could not be sustained. Since the Panel, in a separate decision, had annulled the Corporate Income Tax correction (the primary adjustment), the DGT’s WHT Art. 26 correction (the secondary adjustment) automatically lost its factual and legal foundation. Thus, the Panel fully granted the Taxpayer's Appeal, setting the WHT Art. 26 for the March 2021 tax period to zero (Nihil).
This decision provides significant strategic implications for multinational companies. Firstly, it reinforces the argument that WHT Art. 26 secondary adjustments cannot stand alone. Proving and nullifying the primary Corporate Income Tax correction is the main key. Secondly, the decision underscores the necessity for taxpayers to always prepare strong commercial justification (such as the impact of force majeure like COVID-19) to support the arm’s length nature of their operating margin amidst fluctuating economic conditions. The WP's success hinged on demonstrating that a mere fiscal correction cannot replace the substance of a dividend distribution transaction which requires realization. The PT OE case sets a precedent that confirms the principle of connection between TP corrections and WHT Art. 26 secondary adjustments. The taxpayer’s strategy must focus on strengthening the documentation of related-party transaction fairness (TP Doc) and proving the absence of the material elements of a deemed dividend according to WHT Art. 26 provisions.
A Comprehensive Analysis and the Tax Court Decision on This Dispute Are Available Here